The birth of GATT

Introduction: Somographic Arrangement

Before starting the article, let us go through the definition of Sophomoric Arrangement. A sophomoric view is one held confidently because of lack of awareness of one’s own ignorance. A Sophomoric Arrangement is one which lacks in maturity and is poorly informed and immature. 

What strikes in my mind upon hearing this phrase are two distinct topics, one quite common and talked about, COVID-19 management, and the other less common and restricted to the arena of International Law, birth of GATT.

A wind of caution before beginning, the initial GATT is a sophomoric arrangement only from the perspective of members other than the hegemonic countries, i.e. USA, and UK. For these two countries, GATT was, what we call in Indian politics these days, a ‘masterstroke’.

The GATT, which was set up in 1947, was envisaged as a temporary measure, until ratification of the Havana Charter.[1]

The original intention was to create a third institution to handle the trade side of international economic cooperation, joining the two “Bretton Woods” institutions, the World Bank, and the International Monetary Fund. Over 50 countries participated in negotiations to create an International Trade Organization (ITO) as a specialized agency of the United Nations. The draft ITO Charter was ambitious. It extended beyond world trade disciplines, to include rules on employment, commodity agreements, restrictive business practices, international investment, and services. The aim was to create the ITO at a UN Conference on Trade and Employment in Havana, Cuba in 1947.

ITO: Stillborn

The Havana conference began on 21 November 1947, less than a month after the GATT was signed. It was the first major event at which the emerging numerical advantage of developing countries in the UN became significant. Numerous proposals intended to safeguard industries and allow imposition of trade restrictions were tabled. A charter was eventually negotiated to the satisfaction of most delegations, by which the ITO would become a world economic forum to regulate trade. Special rules were adopted allowing limited trade protection for developing countries to adapt to a freer trade regime.

The ITO Charter was finally agreed in Havana in March 1948, but ratification in some national legislatures proved impossible. The most serious opposition was in the US Congress, even though the US government had been one of the driving forces. In 1950, it announced that it would not seek Congressional ratification of the Havana Charter, and the ITO was effectively dead. The had become too ambitious and as discussed reflected the strength of the developing nations and their favourable policies. So, it never came to be, it was a stillborn.  So, the GATT became the only multilateral instrument governing international trade from 1948 until the WTO was established in 1995.[2]

Some blamed a cold war moon for casting a shadow over the internationalist sun. Others that it was due to a resurgence of economic nationalism. The mood in the US Congress by the time it was presented for ratification had begun to swing against the UN and international institutions. The internationalist Roosevelt/Truman era was coming to an end and the McCarthy era was beginning to cast its shadows. The ITO charter was not brought to the US Congress in time to catch the favourable tide. By the time it was brought to Congress, ratification had become hopeless and the ITO was abandoned even without a vote.

GATT Years

As we have studied, GATT was only supposed to be a stand-in for the third pillar of the economic superstructure, the ITO. However, with the ITO being a stillborn, GATT was asked to step up and fill the shoes. But since partly because of the reason for its foundation, a way for developed countries to further impose their hegemony, GATT in my opinion was a sophomoric arrangement.[3]

The Bretton Woods system was incomplete from the beginning, lacking its intended third pillar. The GATT was a poor substitute and did not fill the gap as, for example, it had no functions for the stabilization of commodity prices or regulation of commodity markets. The latter’s failing has since become more, not less, significant for global prosperity. Attempts to create an influential trade organisation within the UN failed and GATT continued to function. It galvanised the two developed countries (US and UK) into greater co-operation with developing countries which had no safeguards.

A sufficient number of the signatory nations, including the U.S., ratified the GATT for it to enter into force on January 1, 1948, under a “Protocol of Provisional Application” while negotiations on the ITO charter continued.  The GATT survived the ITO’s demise, but it lacked a coherent institutional structure, since the negotiators had expected the agreement to be subsumed under the ITO’s umbrella.

WTO’s Advent

Despite its institutional deficiencies, the GATT managed to function as a de facto international organization, sponsoring eight rounds of multilateral trade negotiations.  The Uruguay Round, conducted from 1987 to 1994, culminated in the Marrakesh Agreement, which established the World Trade Organization (WTO).  The WTO incorporates the principles of the GATT and provides a more enduring institutional framework for implementing and extending them.

Finally came WTO in January of 1995. It did the following:[4]

  1. Implementation of existing trade agreement
  2. Expanding the scope by including agricultural goods, textiles, services, and IP.
  3. Dispute settlement.
  4. Average tariffs in developed countries are less than 5% and in India around 10%, China 8%, and Latin America 15%.
  5. Tariffs and non-tariff barriers.
  6. Merchandised exports have increased from 5.6% (81-94) to 8.9% (95-10). Trade has grown faster than average GDP.
  7. Services trade has also doubled in NA, more than doubled in Europe, and tripled elsewhere.
  8. Dispute Settlement has been exponentially better as evidenced by the reduction in the number of cases which now seem to have achieved a steady state, plus, no delay in resolution. Furthermore, accessible for developing countries, and strict implementation of rulings. Under GATT developing countries accounted for only 8% of the cases as defendants but under WTO they account for 35%. Developing countries account for 1/3rd cases as complainants in WTO.
  9. The biggest evidence of it has been the aftermath of the economic crisis the world recently faced in 2008 and how quick we got out of it. In contrast to the Great Economic Depression which led to the smoot Hawley tariffs by the US on the world in 1930.
  10. Highly beneficial to developing countries as evidenced by a variety of factors including that 30 developing countries joined WTO and 20 more are in the negotiation stage. Plus, more active participation by them evidenced by Doha development Round, leading to focus being shifted on matters important to developing countries like agricultural products. More participation, more representation.
  11. Failure: PTA through Article 24 of GATT and Article 5 of GATS.  Now, 30% of the world trade is through PTA which is in vogue. What happened to their rule of non-discrimination based on country of origin? “A hegemonic power is likely to gain a greater payoff by bargaining sequentially rather than simultaneously with a non-hegemonic power.
  12. Developed countries further push non trade agendas like labor standards, and IP rights which the developing countries cannot afford at this juncture. 
  13. Failure: Policy laundering; Developed countries favored as most evident in agricultural markets wherein the Developed countries have protected their market but have forced developing countries to open theirs. TRIPS agreement which prohibits developing countries from utilizing certain technology which originates from abroad especially in the medicine sector. Increase in non-tariff barriers against practices like dumping which affect developing countries.

Cannot ban a product based on its production, like use of child labor in manufacturing, leading to abuse of human rights. WTO has also preferred profits of corporations v. Human rights. WTO also seeks to privatize a lot of sectors like education, health care, energy etc. which again reinforce the view that WTO is more concerned about profits of corporations over the benefit of individuals. Nefarious activities in the name of “barriers to trade” like environmental degradation like the Shrimp case of the US.

  1. As legal cover for its decision, the United States invoked a rarely used WTO clause that allows members to suspend some trade concessions on national security grounds. Trump’s tariffs undoubtedly violated the spirit of the clause—it is hard to see how steel and aluminum imports that mostly come from friendly nations endanger U.S. national security. But WTO scholars agree that Trump did not violate the letter of the law, which means that he will probably get a pass.

The US asked for a review of retaliation.

I would state that WTO, a big change from the sophomoric arrangement of GATT, is beneficial, the most glaring of evidence being the aftermath of the economic recession in 2008 and the aftermath of the Great depression. However, a multitude of problems it faces stemming from its Profit First approach, developed countries presence, to facing a risk of being obsolete. It has achieved a lot since its inception having the overall effect of stabilizing trade through policies like granting developing countries a voice, to MPN status, to TRIPS agreement, to DSB. 

Now with the defunct WTO, the past has come to haunt us again. The developing countries do not trust the developed world to dismantle its protectionist measures in the fields in which they are competitive – notably in agricultural produce – in return for market-opening decisions. This distrust has always existed. There is also a growing understanding that trade cannot be treated in a vacuum and the need to achieve social balance is not some old-fashioned socialist notion. Would we go for another sophomoric arrangement this time spearheaded by China or we stand up?[5]

Q & A

  1. What is a Sophomoric Arrangement?

A Sophomoric Arrangement is one which lacks in maturity and is poorly informed and immature. Something like management of the present COVID-19 crisis by states like Telangana, West Bengal, Bihar, Maharashtra and so on.

  1. Why is GATT a sophomoric arrangement?

GATT was meant to be a substitute for the much grander and inclusive of developing countries’ needs, the International Trade Organization (ITO). GATT was signed on the promise of being replaced by the ITO which was a stillborn.

  1. Why is ITO called a stillborn?

The draft ITO Charter was ambitious. It extended beyond world trade disciplines, to include rules on employment, commodity agreements, restrictive business practices, international investment, and services. The aim was to create the ITO at a UN Conference on Trade and Employment in Havana, Cuba in 1947. In 1950, it announced that it would not seek Congressional ratification of the Havana Charter, and the ITO was effectively dead. Hence, it is called a stillborn.

  1. What is the difference between GATT and WTO?

The World Trade Organization (WTO) is more powerful than the General Agreement on Tariffs and Trade (GATT) with enlarged functions in dealing with world economic affairs. Hence, the WTO cannot be simply regarded as the extension of GATT. It completely replaces GATT by sporting a totally different outlook.

  1. What is the future of the WTO?

Rather than running a fool’s errand by guessing the US President’s next move, it is advised that the US build on the foundation that the WTO already provides and like its allies like Japan and the EU build coalitions of like-minded countries.

[1] Goldstein, Judith L., Douglas Rivers, and Michael Tomz. “Institutions in International Relations: Understanding the Effects of the GATT and the WTO on World Trade.” International Organization 61, no. 1 (2007): 37-67.

[2] Aaronson, Susan Ariel, and M. Rodwan Abouharb. “Unexpected Bedfellows: The GATT, the WTO and Some Democratic Rights.” International Studies Quarterly 55, no. 2 (2011): 379-408.

[3] Barton, John H., Judith L. Goldstein, Timothy E. Josling, and Richard H. Steinberg. The Evolution of the Trade Regime: Politics, Law, and Economics of the GATT and the WTO. PRINCETON; OXFORD: Princeton University Press, 2006. doi:10.2307/j.ctt7t1bb.

[4] BOWN, CHAD P. Self-Enforcing Trade: Developing Countries and WTO Dispute Settlement. Washington, D.C.: Brookings Institution Press, 2009.

[5] Ostry, Sylvia, Max Corden, and C. Fred Bergsten. “The Future of the World Trade Organization [with Comments and Discussion].” Brookings Trade Forum, 1999, 167-204.

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